FOREX VERSUS FUTURES

A Forex trade is executed almost immediately and delivery of the currencies takes place in 2 business days whereas in a futures transaction the delivery of the underlying asset takes place sometime in the future.

Introduction:

The Forex market differs greatly from the Futures market in that the forex market is a currency market where currencies are traded. The Futures market is a market where underlying assets such as food, precious metals, energy, other commodities, currencies and bonds are traded. In the forex market currencies are mainly traded at spot (delivery 2 business days from the transaction date), however in the Futures market the futures contract details the price that will be paid for the product at a future date in time when the product will be delivered.

Forex versus Futures:

The forex market is the most liquid market on the planet. It is a market where currencies are bought and sold 24 hours a day, every day of the working week, which means that traders can take the opportunities to make money that present themselves at any time of the day or night. Traders can trade in the Asian time zones or the European time zones or the American time zones either one at a time or all together when they overlap. The Futures Market on the other hand is only open 7 hours a day at the most.

Forex transactions are instantly executed and traders pay a fee which is reflected in the spread of the currency rate. This spread is usually between 2 and 5 pips depending on the currency involved. There is no slippage in the forex market similar to what can happen in some other markets. 

The futures market on the other hand involves more than one asset. It includes many commodities such as food stuffs, manufactured goods, and financial instruments including treasury bonds and currencies and agricultural products. The futures contract is not executed instantly for as the name implies delivery of the assets takes place at a date in the future. The future contract itself details the underlying product, the units of the product being bought or sold, the price of the asset and the delivery date. The futures market is a regulated market which transacts standardised contracts which have standardised delivery dates.

Long term traders and even day traders’ trade futures to make a profit or to hedge a financial obligation. Also non-traders who have an interest in a commodity trade futures to hedge against commodity prices going against them. For example a farmer might sell a futures contract to guarantee a particular price for his supply of winter feed for his livestock. A farmer would be obliged to complete the contract at the maturity of the contract. Day traders and long term traders are not concerned with these obligations as they will close the futures contract before it matures.

In addition to standardized contracts there are also standardized contract sizes depending on the underlying asset. For example the EUR/USD contract size is $125,000 a contract or lot. The contract itself would state the minimum price change which is also known as a tick size by which a price can change. For example the EUR/USD is 1 pip or 0.0001 x $125,000 which equals $12.50. So each price change of 1 pip in the underlying asset will either be a profit or a loss of $12.50 to the contract holder.